When someone wins the lottery, the first thing people ask them is “what are you going to do with all the money?!”
If they’re smart? They’ll probably start by hiring a lawyer and an accountant.
Nonprofits have the same delightful conundrum. With the prospect of gifts and “free” revenue, the possibilities can feel endless. But accounting for donations can be complex. Nonprofits must factor in donor restrictions, fair market value of goods and services, and the importance of donor receipts in order to stay within legal compliance and keep donors happy.
Keep reading to learn about the ins and outs of donation accounting for nonprofits so that you can keep your books tidy and your funds properly allocated.
What’s the difference between restricted and unrestricted funds?
Remember getting a card on your birthday from your grandma with a crisp $10 bill inside? And the only instructions were “get yourself something nice?” Thanks, Gam-Gam.
Donor contributions to nonprofits don’t usually arrive in greeting cards. And they may come with much more strict rules on how to use them.
Nonprofit organizations need to pay close attention to the restrictions associated with each monetary contribution they receive. Not only do nonprofits legally need to comply with donor instructions, they must know how and where to record each gift. Since some gifts are meant to be used over multiple years, meticulous record-keeping is crucial.
So what are the different types of gift designations?
- Unrestricted funds are donations without any specification of how or when they should be used. Nonprofits are free to use these funds how they see fit.
- Temporarily restricted funds are to be used for a specific purpose or within a specific timeframe. A donor will spell out the restrictions in the “gift instrument,” an agreement or letter that accompanies the donation. Often, a nonprofit will set-up pre-determined categories to help donors direct their funds. If a gift has a specific timeframe, the entirety of the gift is recorded on the date it was received, even if it might be used years from now.
- Restricted funds refer to monetary gifts that can never be spent. So what’s the point? Organizations use the interest earned on the initial capital — talk about the gift that keeps on giving! A classic example of restricted funds would be a university endowment.
How do nonprofits record monetary donations?
Once you know how each gift is designated, you then need to know how to sort them in your books.
Restricted and unrestricted funds must be accounted for separately. So when it comes to your statement of financial position (balance sheet) and statement of activities (income statement), a multi-column approach is needed.
One last thing to remember: your nonprofit isn’t obligated to accept a gift. Especially if its donor restriction isn’t in alignment with your nonprofit’s mission or needs at the time of giving.
How do nonprofits record in-kind donations?
Not all gifts are financial. In fact, many nonprofits rely on donated goods and services to keep them going.
In-kind donations can be anything from clothing, food, books, vehicles, to specialized skills or labor. These types of donations provide organizations with the necessary tools, equipment, and materials they need without eating up unrestricted funds.
But if it’s not cold hard cash coming in, do nonprofits still need to tell the IRS about it? That’s still a big yes.
When preparing documents according to GAAP, nonprofits are required to report in-kind gifts using their fair market value. Fair market value can be determined in a number of ways depending on the gift:
-checking the value of the good in the open market
-determining the average salary cost of a specialized skill
-determining going rates for labor
The fair market value of an in-kind donation must be recorded as revenue, as well as an expense on your functional expense report. Reporting both will cancel each other out, meaning it won't affect your net. However, each entry will affect the total revenue and expenses for your organization — an important piece of information required by the FASB and IRS.
Do donors need proof of their gifts?
When you receive a gift, it’s important to say thank you. Or at the very least acknowledge the fact that you’ve received it.
Donor receipts are important tax documents for both nonprofits and donors alike. They help keep track of gifts while providing donors with the proof they need to deduct their gift from their income taxes. Nonprofits are required to issue receipts for gifts of $250 or more.
A write-off on a donor’s personal income tax can seem like a nice thank you. But if you’re a classy organization who wants to take it one step further, donor acknowledgment letters are an important way to recognize contributions. They can go a long way in maintaining donor relationships.
Ready to accept donations?
Donations are the life-blood of nonprofit organizations. As a result, it’s important to prove to both your donors and the IRS that you are handling them with care and integrity.
Reputation is everything. Especially in the nonprofit world. Make sure you’re putting the proper management and bookkeeping measures in place to direct each donation to its proper place. Otherwise you may end up losing important donors and grants, or find yourself in a legal battle.
Need help recording your in-kind gifts? Reach out to KYN Accounting today for friendly, helpful advice on how to account for donations.